Decision Journals for Investing

One of the most common questions I get from others is also one of the most frustrating questions I get asked. And with the sharp decline in the price of Telstra over the last couple of weeks, its probably time to address it.

Far too often does someone say to me something along the lines of: “I bought so and so and now it has halved. What do I do?” or “I bought so and so and now its doubled. When do I sell?”. Like all good economics and investing questions, the answer is of course, it depends.

Be the (wo)man with the plan!

As with everything else in life, a little bit of planning in the early days can save a lot of headaches down the track. For me, these questions miss the point a little bit – as an investor, you should already have a plan for the investments you make. Personally, I’m looking at the future dividend potential of an investment. This means that the vast majority of my investment plans focus on whether or not the company will continue to pay growing dividends into the future.

Your specific plan will be determined by a number of things, but a great question that will allow you to figure out some triggers for selling is “Why did I buy this in the first place?”

A quick example:

We’ll take the Telstra issue as an example. I’ve never personally owned the company, but know a lot of dividend investors were attracted to it due to the high yield. Bear in mind this example is illustrative only – I don’t necessarily agree with the actual reasoning for a number of reasons.

Telstra – Buy

I am buying Telstra because at current prices the investment offers a compelling yield.

I expect the investment to be relatively low volatility given strong dividend support.

I expect low single digit growth in the dividend, and therefore expect low single digits capital growth

Plan:

I will hold the investment while it continues to pay dividends.

I will sell the investment if the dividend is cut.

I will sell the investment if the dividend is no longer greater than cash rates and there is no prospect for capital growth

Your plan might also include any alternatives to the proposed investment, and some numbers explaining your probabilities you assign to each of the potential outcomes.

Another thing I like to personally do is write a brief statement about how I feel when I make the investment. For example, the last investment I made the statement was “I am excited about being involved in this opportunity but concerned that I may be too excited”.

The important things to note about the above example:

It is very clear with little room for “wiggling”. Believe me when I tell you that your mind has an amazing ability to manipulate history to be more flattering towards yourself.

The plan has a range of expected outcomes – try to plan for all foreseeable eventualities, even if you don’t think they are very likely, as this can be a great way of stress testing your investment.

The note removes the impulse to sell for terrible reasons – Roger Montgomery was on the TV, the market feels terrible, I saw some scary charts, etc

Additionally, don’t expect your plan to be right. Far more important than being able to foresee every possible outcome is the actual process of planning itself. Your plan will also need updating periodically, and needs to be current enough that it provides an excellent anchor for when you review your investments.

In hindsight, the Telstra note makes the course of action simple – the dividend has been cut, so I am selling.

What you are trying to avoid here is the following chain of logic: “Even though the dividend has been cut, the share price has come down in concert, and now the company once again is trading on an attractive yield. I will hold.”

This has been the primary source of my investment mistakes over the long term. When your investment thesis changes, you need to be brutal and pragmatic – if you drift (as I have in the past), you will end up holding Telstra through potentially more downgrades/dividend cuts and the reason why you got into the investment in the first place will not look anything like your current investment.

On the other hand…

It might be the case that holding on is the right course of action. In that instance, I’d take a look at the investment as a new investment. Just be aware that you are making a new decision; also be aware that my personal experience with changing your reason for holding investment typically just sees me compounding one mistake with another.

You should also try to make sure that your “new” investment is the best use of your capital – are you sure you can’t find something more promising to invest in with your hard earned dollars? After all, you don’t need to make your money back the same way you lost it.

Your plans provide an excellent opportunity for reflection:

Leaving aside the fact that the process above should help you make better decisions, it is also incredibly useful to be able to review your plans in 6 month intervals. By regularly reviewing your plans, you will be able to determine why you frequently make mistakes, and why type of investments you make that are profitable vs unprofitable.

This might be humbling – often times I find that investments work, but not for the reasons I outline in my initial plan. Better to be lucky than unlucky! It also helps to distinguish where your investment decision was correct, but unforeseeable events cruelled your outcomes.

Overall, we just want to focus on making the best decisions possible, for the longest period possible. That’s how you achieve inevitable wealth. In my experience, decision journals will help you improve your decision making – a huge win for any investor.

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6 Comments

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I agree! Everything is better with a plan. Decision making is a breeze with a plan. If you know where your boundaries are and what your comfort zone is, then there is much less chance of making a false step or one in a panic that you will later regret!

Hey ADI – nice to find your blog. I think having some kind of plan for entering and exiting an investment is very important. Otherwise all we’re left is is to be ruled by emotion or to follow the crowd. Neither seem like the most profitable approach! I try to have a price for which I’ll sell at, or a set of business conditions I think indicate it’s time to sell (e.g. the plan has come to fruition, the thesis was wrong, or the business qualities decline to an unattractive level for the foreseeable future).

You are absolutely right ADI. Never expect the plan you have chosen to be right. Far more important than being able to foresee every possible outcome is the actual process of planning itself. The plan will also need updating periodically, and needs to be current enough that it provides an excellent anchor for when you review your investments.

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